Brexit: GBP COULD FALL A FURTHER 15-20% vs USD

A Brexit vote could lead investors to worry about the UK’s ‘twin deficits’. To date, these have largely been ignored by the FX market. Brexit could raise concerns and Mark Carney, the BoE Governor, recently warned that Brexit could leave the UK reliant on “the kindness of strangers” in an environment of global economic volatility.

Already a gap has opened up between the observed level of sterling and the level implied by interest rate differentials. If the currency market is pricing in around a 33% probability of a Brexit vote, GBP-USD could fall by around another 15-20% should a Brexit vote occur (i.e. if the probability shifted from 33% to 100%). This would see GBP-USD falling to levels not witnessed since the early 1980s. We also think that the GBP would come under pressure against the EUR. Indeed, EUR-GBP could move towards parity in the aftermath of a Brexit vote.”